Fund managers told to come clean on costs

Research group DMP Financial believes the retail fund management industry should be more open about the costs that eat away at investors' returns in popular unit trusts and openended investment companies.

Richard Saunders: Dissenting

DMP says the current measure of a fund's annual expenses, the total expenses ratio (TER), understates the true costs that investors suffer.

This is because the trading costs in buying and selling holdings within a fund are omitted from this calculation.

Matthew Morris, a director of DMP, says the size of these hidden costs – across all pension, insurance and investment funds – is £22bn a year, equivalent to an extra 0.7% a year.

This figure is based on analysis of trading costs incurred by 350 retail funds.

'The TER is not the whole story,' says Morris. 'Investors should be given a figure that represents the true total. The average total cost of having your money invested in an actively managed fund is well above 2% a year.'

DMP is not alone in calling for such change. Alan Miller, founder of investment house SCM Private, believes fund investors would opt for lower cost alternatives such as exchange-traded funds and index-tracking funds if the true cost of running active funds was revealed to investors.

Richard Saunders, director general of the Investment Management Association, disagrees.

He says that if fund managers were forced to keep down trading costs so as not to make their funds look expensive, they might miss out on investment opportunities of benefit to investors.